EIU Global Forecasting Service

Global trade slumps as US steps up protectionist policies

Moderate probability, Very high impact; Risk intensity =

January 24th 2018Introduction

We currently expect further years of robust global trade growth in 2018-19, buoyed by strong emerging-market export growth and an upward adjustment to our Chinese economic growth forecasts. However, there is a risk that the administration of the US president, Donald Trump, steps up its protectionist rhetoric into more concrete action that severely damages global trade channels.

Analysis

There are a number of scenarios in which this could come about, but two that we are particularly concerned about include withdrawal from the North American Free-Trade Agreement (NAFTA) and measures that instigate a trade war with China. Mr Trump believes that persistent trade deficits are evidence that the US is "losing" on trade and that the current system allows too many goods sourced from elsewhere (often China) to enter NAFTA tariff-free. There is therefore a risk that Mr Trump may attempt to face down significant business lobbying and pull the US out of NAFTA. There is debate over whether or not he would need congressional approval to do this, but this would not prevent him from him trying. An end to US participation in NAFTA (or even just a rise in uncertainty over its membership participation) would create enormous ructions in one of the largest free-trade areas in the world. As well as the disruption to North American trade (and severe damage to the Mexican and Canadian economies), an end to such a major trade deal would be likely to fuel protectionist sentiment elsewhere in the world, making it harder for regions and countries like the EU and Japan to push a more liberal trade agenda. Meanwhile, there is every indication that the US will ramp up measures targeting China's exports in 2018. Several investigations into imports of products to the US have the potential to serve as sources of friction between the two nations, especially with the US likely to increase tariffs targeting Chinese firms in the affected sectors. There is a danger that these trade disputes could escalate into a full-blown trade war if China were to retaliate disproportionately.

Conclusion

Any ramp up in protectionism would certainly have repercussions beyond North America and China. Prices and availability for US and Chinese products in the supply chains of companies from other nations would be badly affected. Global growth would be notably curtailed as investment and consumer spending fall back.